GST to remove tax cascade on Indian auto sector

The market is witnessing a downpour of liberal discounts with many dealers off-loading their stock

The Indian automobile industry has been subjected to multiple levies such as excise duty, VAT, central sales tax (CST), entry tax, infrastructure cess and automobile cess. The Goods and Services Tax (GST) has subsumed all these levies but has also introduced a new kind of a cess over and above GST for certain types of automobiles.

When a car is manufactured in a factory in India and sold within the state of manufacture, the VAT is calculated after adding the excise duty. Similarly where there is an inter-state sale, CST is payable on the price inclusive of excise duty. This cascading effect will be arrested in the GST regime since CGST and SGST will be calculated separately on the price for a local supply and IGST will be the only levy for an inter-state supply.

Auto componentsThe sourcing pattern is driven by tax credits and hence predominantly a manufacturer will prefer to purchase locally unless the material is not available locally. Wherever the component is not available within the state, the car manufacturer has no choice but to purchase the component on inter-state basis wherein the CST of two per cent charged becomes a cost. The component manufacturer also suffers increase in cost since most of the materials required for component manufacture will be purchased by him from another state. Thus, the cost cascade gets reflected in the price.

The GST will remove all the shackles and limitations in sourcing and the automobile manufacturer as well as the auto component manufacturer will have absolute freedom in sourcing goods from any location since all procurements qualify for input tax credit.

India has a law known as Legal Metrology Act which sets out the standards for weights and measures. This legislation also mandates the information that has to be printed in the label on the packing material; quantity; other information; quantity as well as maximum retail price (MRP) inclusive of taxes.

Generally, a tax is levied on the sale price. However, since the excise duty was confined to manufacture, a number of products including automobile components were identified for valuation mechanism, whereby the excise duty was payable on the MRP as reduced by a certain notified percentage known as abatement. To illustrate, where the selling price is Rs10,000, the duty will be payable on a higher value, calculated based on a certain percentage of MRP. The GST law does not have MRP-based valuation and the vendor of the components will charge GST on the selling price paid or payable.

GST ratesThe current tax structure for a manufacturer who manufactures and sells automobiles in Tamil Nadu and the GST structure recommended by the GST Council is set out in the table below.

As can be seen from the table, there is no major reduction in the GST rates and the rates are more or less in line with existing rates. The customer will also see marginal relief in the small car segment while the luxury cars segment may see some downward pricing.

At the dealer level, for the first time, the car dealer will enjoy better tax credits. While the outflow from the dealer to the manufacturer will be the same, the entire GST paid to the manufacturer will qualify as credit in the hands of the dealer.

Import segment and GSTThere are two types of imports in the automobile segment. In the first segment, components are imported or vehicles are imported in completely knocked down (CKD) or semi knocked down (SKD) condition and assembled in India. In this segment, the countervailing duty (CVD) and the special additional duty (SAD) are significant cascaded taxes since CVD is calculated after adding basic customs duty (BCD) to value and SAD is calculated after adding value, BCD and CVD. Even though there is a cenvat credit of the CVD and SAD portion, the outflow is significant.In the GST regime, BCD will continue and will form part of cost as in the past. However, the IGST which is the only levy in addition to BCD will qualify for tax credit.

In the second segment, when cars are imported and sold as such within India, as a trader, the CVD and SAD forms part of the cost since the trader discharges VAT and does not qualify for cenvat credit of the CVD and SAD. In the GST regime, the trader will qualify for the IGST credit. This will bring down his cost significantly and there will be a consequential increase in trading operations.

ComplianceGST is a tax based on supply. Every supplier has to be registered in every state from where he makes a supply. Hence, compliance costs will increase. Further registration in each state will imply filing of returns, maintaining books of accounts, etc. The online filing requirements could be a minimum of 37 filings per state and can go up to 61 filings if there are further compliance points.

Customer perspectiveWhen cars move from one state to another, the recipient state imposes entry tax. The biggest relief from a customer perspective will be the subsuming of entry tax into the GST. Further, many states imposed entry tax even on imported cars on the premise that the goods enter the local area after they crossed the customs frontiers. Entry tax will no longer be leviable in the GST regime. Further with GST round the corner, the market is witnessing a downpour of liberal discounts with many dealers off-loading their stock.